Liquidity, bond market, measures

US Treasuries closed a little more volatile on tuesday excluding long-term bonds, mostly driven by floating futures block trading and the UK government’s soothing fiscal budget u-turn this week. UST 2Y’s yield was 4.49%, while the much-watched UST 10Y remained at 4.07%, a 15-year high. Markets are fully priced in at the next FOMC meeting on November 3, with a 75 basis point gain in the 3.75-4% range. Meanwhile, investors are battling views over uncertainties involving central bank policies, inflation and possible recession. Balances at the Fed’s Reverse Repo facility have risen again to over $2 trillion as cash from government-backed institutions enters the markets for funds. The statement from the Treasury shows that market liquidity is also considered important while advancing the QT: “US Treasury asked major banks to buy back some US government bonds to improve market liquidity“. Some attention will be paid to data releases covering housing starts and building permits today.

Private sector bonds contain nearly $2 trillion in floating rate securities. No breakout has been seen in this market yet. This is reflected in the Fed’s latest meeting minutes: “Corporate bond spreads narrowed slightly on the net and remained roughly at the midpoints of historical spreads. Yields on corporate bonds have risen significantly since the start of the year, reflecting increases in both policy rates and corporate bond spreads. It widened municipal bond spreads by one notch over comparable futures Treasury yields.”

While the Fed adjusts for the degree of rate hikes that do not put the economy in a recession, the majority view is that doing too little against inflation will outweigh the cost of doing much. 10-year bond yields have taken the initiative again in this regard. As interest rate sensitivity increases, we observe its reflection in the yield curve. The 30-year Treasury yield briefly surpassed 4% for the first time since 2011 after the warmer-than-expected September inflation data. After a possible 75 basis points increase in interest rates by the FOMC in November, the pricing of a 5th consecutive rate hike for 14 December is gaining weight, and this rate hike is likely to be jumbo in size. This high and rigidity experienced on the CPI side shows that the 5% policy rate will enter the cards in 2023.

Truss’s step back from the financial plan relieved the markets a little, while the BOE is trying to control the market with temporary bond purchases. BOJ continues to struggle with yen and yields. While the currency is just above intervention levels, it will be at a point that forces policy change when JGB yield starts to persist above 0.25%. It seems difficult for both central banks to maintain control over both exchange rates and bonds. At its last meeting, the SNB also increased the interest rates and ended the negative interest rate application.

If we look at Turkish assets; Government bonds rose after a rule change would force the country’s lenders to carry more lira-denominated securities as part of the central bank’s strategy to support the battered currency. The 10-year lira bond yield fell by 290 basis points to a record 10.22%. The lira changes very little.

The central bank announced changes aimed at encouraging the conversion of foreign currency deposits into lira. In the latest move, the central bank increased the rate of issuing lira-denominated securities from 3% to 5%, forcing lenders to hold more of their securities in lira. The central bank said additional “liraization strategy” steps will be taken this year and in 2023. Such measures have helped push 10-year lira bond yields down by 1,277 basis points for 2022, in the biggest decline since 2011. The main impact of this will be on bonds with a maturity of 5 years and longer. However, the return moves reflect artificial demand driven by “banks and pension funds that have to buy, not the real investor.”

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı